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The Employee Ownership Update

Corey Rosen

June 15, 2010

(Corey Rosen)

Only 141 ESOP Lawsuits Involving Private Companies Reach Court Over 20 Years

We have just completed a comprehensive review of ESOP and 401(k) plan litigation over the last 20 years and published it as ESOP and 401(k) Plan Employer Stock Litigation Review 1990-2010. In this review, we found only 141 ESOP cases involving closely held companies (plus 35 involving public companies), not counting a handful we did not include because they deal with issues tangential to current plans. The most important issues in these cases have been valuation, improper distributions, and questions about whether assets should have been diversified.

The review makes it very clear that companies that hire qualified professionals, follow good plan practices, and are not using the ESOP to extract money from the company for the benefit of a few people (often by stretching the law), are very unlikely to be sued, much less lose in court. On the public company front, the review shows that almost all the ESOP cases and about two-thirds of the 401(k) cases have been dismissed at the pleadings stage based on the so-called Moench presumption, which grants a presumption of prudence for investment in company stock, especially if the plan mandates employer securities as an investment. On issues of required disclosure, courts have fairly evenly split over whether fiduciaries must release non-public information.

The 35-page ESOP and 401(k) Plan Employer Stock Litigation Review 1990-2010, available at $75 for NCEO members and $150 for nonmembers, tracks almost 300 cases from 1990 to 2010, providing citations and categorizing the decisions by ESOPs and 401(k) plans and then by the kind of decision reached.

Huawei Now the Second-Largest Employee-Owned Company in the World

The second-largest employee-owned company in the world is China's Huawei, a global provider of telecommunications networks. The 95,000-employee company is entirely owned by its Chinese employees, over 61,000 of whom hold a kind of restricted stock that must be sold back to the company at departure. Shares are held in a holding company and are awarded based on performance and position. The company says legal issues make it difficult to provide ownership to non-Chinese employees. Employee ownership is common in China, although good data on its exact extent is not available.

Four Employee Ownership Companies Named Winning Workplaces Winners for 2010; Four More Named Finalists

Four of the 20 winners in the 2010 Top Small Company Workplaces competition, sponsored by Winning Workplaces, a nonprofit organization, and Inc. magazine, are employee-owned. They are:

Four of the 20 finalists are also employee-owned:

Chroma Technology and The Sky Factory have their own unique employee ownership structures, Cargas Systems employees buy stock directly, and the remaining companies are ESOPs. All the ESOP companies, as well as Cargas Systems, are NCEO members.

The award annually recognizes small companies with the best workplace practices. For details on the winners, go to this link.

Twelve Minutes

That is about as much time as you could buy with an employee ownership lawyer at the cost of a $90 NCEO introductory membership. Yet it's not uncommon for people to ponder this decision at great length and decide not to spend the money now, instead setting off on starting up their plan and continuing to run it without the resources we can provide to help you make sure you do it well. If you are not now a member, I hope you'll look around this Web site, see what we have to offer, and join.

The fact that people do this raises a larger issue in how we relate to money. When I used to work on Capitol Hill, I noticed senators could spend a long time debating a $500,000 project and a few minutes passing a multi-billion dollar budget. Small numbers are just easier to relate to. That means when companies do strategic planning, it's important to break down the costs into lost of small bites or some pretty big mistakes can be made. Not spending the $90 to join is one strategic mistake you shouldn't make. Learn more at our page on member benefits.

Author biography and other columns in this series

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